AT & T May Have More Options

Washington-The Federal Communications Commission apparently may give AT & T Corp. additional flexibility in meeting cable-ownership rules in connection with its merger with MediaOne Group Inc., FCC and cable sources said last week.

Originally, the commission planned to require AT & T to divest either Time Warner Entertainment or Liberty Media Group to gain merger approval.

But FCC sources said last week that the agency may give AT & T the option to sell other cable systems to comply with rules that limit one cable operator to control of no more than 30 percent of pay TV subscribers.

After buying MediaOne, AT & T would have about 40 percent of pay TV subscribers, assuming AT & T's 25 percent stake in TWE (which has about 9.4 million subscribers) is counted.

FCC sources said AT & T would have six months from the date it closed on Media-One to tell the agency about how it intends to comply with the cable-ownership limit.

AT & T would have one year to carry out the plan, starting from May 19, 2000, when a panel of U.S. Court of Appeals for the District of Columbia Circuit judges upheld the ownership rules, commission sources said.

One FCC source stressed that several options were in play, and that nothing had been voted on by the five commissioners. The source predicted that the FCC would act on the merger soon.

An AT & T spokesman declined to comment on the latest development. "We are hopeful that the merger will be approved shortly," the spokesman said.

Cable experts said the flexibility the FCC may offer would not really be all that attractive to AT & T. They said AT & T would have to sell nearly 10 million cable subscribers outside of the TWE partnership to retain its stake in TWE.

But one cable-industry source disagreed, arguing that AT & T has millions of subscribers in which it does not have controlling stakes, which it could shed to come into compliance.

One scenario is for AT & T to use the fact that it can sell any cable systems it wants as leverage in telephony and Internet-access negotiations with Time Warner Inc., which is merging with America Online Inc.

But Scott Cleland, a cable analyst with Legg Mason Wood Walker's Precursor Group, noted that an AT & T agreement with AOL Time Warner Inc. might require Department of Justice approval under the consent decree announced May 25.

The DOJ said that for the next two years, AT & T would need government approval for any agreement with AOL Time Warner that would involve the joint sale of residential broadband service or that would bar AT & T or AOL Time Warner from offering broadband service to customers in any geographic region.

Conceivably, AT & T could back out of TWE and buy out Cablevision Systems Corp. AT & T owns 33 percent of Cablevision, but under FCC rules, all of Cablevision's 3.4 million subscribers count toward AT & T's totals.

AT & T could also sell its Cablevision holdings if it decided that it wanted to remain in the TWE partnership, a cable source said.

Janco Partners analyst Ted Henderson said that while Cablevision could be a component of any AT & T Time Warner deal in the future, he leans toward AT & T divesting Liberty to satisfy the FCC.

Paul Glenchur, a cable analyst with Schwab Washington Research Group, said the key element for AT & T is obtaining time to restructure.

Although a court has upheld the cable-subscriber-limit law, AT & T is challenging the FCC's rules that cap it at 30 percent of pay TV subscribers. Oral arguments in the case are scheduled for Oct. 17.